[Originally published on 3/3/2014]
If you're scared to buy stocks near all-time highs, I have good news for you...
History tells us you have nothing to worry about. Seriously.
Let me explain...
The old saying goes that you need to "buy low and sell high" to make money investing.
But if you take that idea at face value, you'd be a fool to buy stocks when the S&P 500 sits near record highs, right? I mean, how much higher can it really go?
That's the attitude 99% of investors have... but it's completely wrong.
Since 1900, the average 12-month gain on U.S. stocks was 5% (not including dividends). However, if you bought stocks when they hit all-time highs and held for 12 months, your average gain was 50% higher... 7.5%.
Importantly, history shows consistent outperformance when you buy stocks at all-time highs. Take a look...
As you can see, buying at all-time highs and holding for a year or less beats the market. On a one-month time frame, buying at all-time highs nearly doubles the average market performance...
Even though this is true, most investors trade the opposite way...
They think it's foolish to buy at new highs. They are wrong – based on history at least.
Since 1950, the results aren't as amazing... But they still show buying at all-time highs beats the market over the next 12 months.
It is worth noting that once you hit a two-year outlook, this outperformance begins to disappear. Traders would say that stock prices "return to the mean."
However, if stocks continue to hit all-time highs as you hold, the outperformance should continue, based on history. In that case, the trade just keeps resetting in our favor.
Of course, anything can happen today. And while I expect higher prices over the next few years, no one can know for sure where the market heads next.
The important thing is that you don't trap yourself on the sidelines. Don't feel stuck. Don't feel like you can't buy just because the market is near all-time highs.
If anything, you should be eager to buy when you see all-time highs.
History is clear, when stocks hit new highs, more gains usually follow.